June 23, 2004

Levels and Rates of Change, Jake, Levels and Rates of Change...

The very sharp and usually incisive Jake Schlesinger fails to distinguish between levels and rates of change:

WASHINGTON -- With the economy now growing at a rapid clip, and employers finally hiring again in industrial Midwest battleground states, Democrats are losing a pillar of their 2004 campaign argument: that a weak recovery is making it unusually hard for Americans to find work...

That the labor market is finally improving--that it is no longer becoming harder and harder month by month to find jobs--does not mean that the labor market is good. A few months of employment gains are good news: they mean that it is a little less bad out there in the labor market than it used to be. But don't confuse rates of change with levels: there are still perhaps 4 million people either unemployed or out of the labor force who would have jobs if we had a labor market in equilibrium. (And there are 6 million who would have jobs if we were in a boom like the late 1990s.) It's still unusually hard for Americans to find work--just not as unusually hard as it was six months ago.

But I already said this yesterday:

Jake goes on to recover--later in the article:

The current reality is a mixed picture. Forecasters expect the economy to grow by 4.7% this year, according to a survey by Blue Chip Economic Indicators, the fastest pace since Ronald Reagan won re-election in a landslide in 1984. Employers have created 1.2 million jobs since August, and the unemployment rate is 5.6%, down from a peak during Mr. Bush's term, last year, of 6.3%. So things are getting better in many ways -- but remain worse than when Mr. Bush took office in January 2001. The unemployment rate back then stood at 4.2%, and the economy had 1.2 million more jobs.* And while the White House says Mr. Bush has addressed middle-class financial concerns, in part with a series of federal tax cuts over the past three years -- opponents note that some of those reductions have been offset by sharp state and local tax increases during the same period...

The thrust of the lead paragraphs of the article, however, remains that:

Democrats are losing a pillar of their 2004 campaign argument: that a weak recovery is making it unusually hard for Americans to find work.... Democrats are edging away from their charges... [of] a "jobless recovery".... That argument is giving way to the line of attack that working America is suffering a "middle-class squeeze."

And here we have run into the self-referentiality of the press corps. It remains true that a weak (employment) recover is making it unusually hard for Americans to find work. But a press corps that cannot distinguish between rates of change and levels--between good employment news and a bad labor market situation--is unwilling to transmit that message. It is not that the Kerry campaign is not switching to real wage stagnation--the "squeeze" argument was always there. All of us who learned about this at the feet of Magister Eugene Sperling have long known that the key is good jobs and good wages, and that you push hardest whatever part of that message currently resonates with the press corps. The story is not that Kerry and his economic advisers have switched their beliefs about the state of the economy: the story is that the press corps is tuning in to a different part of the frequency band broadcast from the Kerry Radio Tower.

Over the winter and spring, the stagnant real income argument did not resonate as well with the press corps as did the employment gap argument. But it was never any secret that the prolonged weak labor market period has put an astonishingly and terrifyingly tight lid on the incomes of those Americans who aren't coupon-clippers. As John Irons writes:

As a share of the economy labor compensation has not been this low in almost 40 years (since 1966), and after-tax corporate profits are at the highest levels ever recorded by the Bureau of Economic Analysis. Since its peak in 2001, as a share of gross domestic product (GDP), labor compensation has decreased by about 4 percent (from 67 to 63 percent) and corporate profits have increased by about 4 percent (from 8 to 12 percent) — see chart below. After taxes, corporate profits reached 9.6 percent of GDP — the highest level recorded dating back to 1947.

*Have I said that the "1.2 million fewer jobs" number should always be coupled to the "2.2 million more unemployed" number and the "8.6 million more adults without jobs" number? None of these three is the summary statistic of the state of the labor market I would choose, but putting all three forward is better than putting just one forward.

Is there a problem with the notion that, on the way from bad to good, there is a period when things are getting better, but are not yet good? This seems to me to be a pretty safe way to avoid accusations of partisanship, while getting the description both right and clear. Good job growth is on the way to a good labor market, but we aren't there yet.

All that fails to negate the idea that the Democrats are going to find it harder to assert their case against Bush economics. Everything you say is true. But if Kerry, hardly an incisive speaker, repeats it all to an audience to whom Bush simply claims "I'm creating jobs", who will keep their attention? Kerry is already getting a mixed reception to his "you are not getting richer, you are getting poorer" speech. In my view this is because, first, it is not a positive message, and second, the argument takes a little more explaining, as is clear here. As Carter found out in 1980, such a message doesn't get you elected.

And Brad's unfair to the press: it's not their fault if the American public doesn't understand (or more likely doesn't try to understand) the difference between rates of change and levels. This is a point the Bush campaign knows and exploits very well. Don't always blame the messenger.

Paulo, the idea that the American public doesn't "try" to understand is a bit of an oversimplification. Most people lead busy lives and they assume honesty from their sources of news. When those sources are less than honest, how is the average member of the public to know and evaluate that?

As for Kerry's message, actually, it's hard to get any information on how his speeches are being received, because it's part of the official script these days that Kerry is doing nothing. But the polls suggest that the public prefers Kerry on matters economic....

Paulo - Shouldn't we expect the press to be smarter than the public (in general)? I mean, most people don't read Brad's blog to get their economic news - they read the WSJ or Business Week or some other media publication. I don't think Brad's being unfair at all in expecting them to get their facts straight.

"Paulo - Shouldn't we expect the press to be smarter than the public (in general)? I mean, most people don't read Brad's blog to get their economic news - they read the WSJ or Business Week or some other media publication. I don't think Brad's being unfair at all in expecting them to get their facts straight."

They probably don't even do that, they probably get any news from TV but many people get no economic news at all.

The problem is that, despite all your numbers and explainations, a layman like me still hears someone say improvement and has the simplist, though inaccurate, statistic to back that claim up, and I'm happy.

Well, actually, not happy because I'm a blogger and pay more attention then most. Still, it's the simplist of messages that worm into the minds of the masses.

This is the basis for my argument that a solid calculus class is necessary to be an educated human being. Until your really understand derivatives and integrals you don't have really get flows vs. stocks. You need to have it driven into your head through a year or more of calculus to understand the concepts.

The Metropolitan Area Employment and Unemployment release for May 2004 is scheduled to be issued on June 30. The Regional and State Employment and Unemployment release for June is scheduled to be issued on July 20.

Note that MI, OH and WV are all Midwest battlegrounds. MA and IL are solid Dem. The verdict for all these states is better than 3 months ago, worse than 1 year ago. This reflects some recalls of workers laid off in the past year. These are workers who will wonder if it will happen again. Meanwhile workers laid off in the last year are still out of work in these states.

Here's my question, though: while it's long been apparent that reading the newspaper is perhaps the worst possible way to consume economic information, does this actually matter for the election?

Election models that incorporate economic data do so directly. The inputs are unemployment or inflation, not media coverage of unemployment or inflation. The rationale, I always assumed, was that the electorate as a whole resembles a lagged economic measuring stick that is relatively sensitive to real economic conditions rather than press reports.

"A new government report shows that an estimated 35,800 workers in Michigan have lost unemployment benefits in the first three months of 2004 and that if unemployment benefits are not extended, an additional 88,328 workers in the state will lose benefits in the next three months."

I don't see how these kinds of numbers can possibly translate into support for Bush policy in Michigan or the rest of the Midwest.

At or near the top of the compensation pyramid, payment for work is highly subject to relabeling ... as capital shares, deferred and disguised income (e.g., "top hat" insurance contracts), or business profit as opposed to proprietors' executive compensation.

What's the trend in labor compensation share of output for ordinary households (as represented, perhaps, by wage and salary income up to the FICA limit)?

And what's the trend in intermediate-range labor compensation, in the space between these bounds?

OK, so there's a marginally-accurate meme out there making Bush look good, and a wonkish refutation pointing out that the reality isn't that good.

So how about going back to the original crude, unfair simplification -- which happens to be factually accurate?

"George W. Bush is Herbert Hoover -- he has the worst job-creation record of any President in two generations."

Being scrupulous about accuracy and fairness is fine, but that obviously won't be allowed to happen except insofar as it helps Bush. Real accuracy and fairness is too complex for the average voter to understand, you see -- especially when the Republicans spend ten or 20 million pumping out an inaccuracy.

So why not realize that the fairness doctrine is dead meat, that we're playing jungle ball, and that we have a pretty strong weapon in our hand?

While what you say about job losses up to this point is true, to label Bush a "Job Destroyer" is equally unfair. The fact is, (and I am sure some people on this board will disagree) that we would be in exactly the same position if Gore was in office. The President, no matter what party he happens to be from, has very little actual control over job creation or loss. He cannot force companies to hire and he typically gets too much credit in good times and too much blame in bad. It has much more to do with the overall business cycle and the federal reserve than it does with the President. Bush, to his credit, attempted to stop the loss of jobs by cutting taxes and creating incentives for companies to buy equipment, and as a result jobs are coming back by the hundreds of thousands per month.

Joe: See his graph. Employment to civilian adult population down from 64.4% to 62.2% and stuck there. Conservatives love the household survey, which is the numerator, while the rest of us who harp on the fact that the labor supply is growing have that captured in the denominator. Taking the 2.2% difference times the adult civilian population, my estimate is near 5 million (not 6) but you get the drift.

Perhaps we could just have a button we could push to give an auto-response to posts like wtf's:

"It would have made a big difference if Gore had been [s]elected. Bush's back-loaded tax cuts did very, very little for job creation. We would have seen a much better employment picture if we had had front-loaded tax cuts that targeted consumers rather than the rich, and had supplemented these tax cuts with public works projects and with aid to our state governments."

It ain't a fact if it didn't happen. It just suits your style of argumentation to insist on "fact" when you are guessing. Any president can propose direct job creation in his budget, if he so chooses. Any president can propose grants to the states with strings attached - strings that can involve hiring. So saying that its just a "fact" that Gore could have done no better than Bush is just nonsense. Beyond that, you've already tried peddling this "Bush is good for jobs" line, while insisting that grants to states would only, what was it?, go to union members in the public sector? So if Gore had simply ignored your budget preferences, he could reasonably have done a better job on jobs that Bush. And if those of us who think stimulus at the low end of the wage scale would have worked better than at the high end are right, the effect policies you don't like could have been magnified, as more household spending led to more hiring. You keep asserting that the most lagged job recovery (relative to output) is a sign that Bush policies have worked, but the economy has a habit of growing, eventually, by itself. Points to to leaders who perform better, not worse, than their peers, leaders who can demonstrate that their policies have done what the public wants them to do. Belated job growth doesn't seem to fit the claim that Bush policies deserve credit, especially when, as you point out, the Fed has also been on the job. What earthly evidence can you show that Bush has performed well against some economic benchmark? Massive deficits leading to much belated employment gains ain't a record to crow about.

And wage income as a % of GDP declined from 67% to 63%, a 4% absolute drop, oddly enough, though a mere 6% percentage decrease.

wtf:

Among other stimulus policies that Bush passed was a corporate tax reduction in the form of sharply accelerated depreciation allowances, to the tune of, I think, $14 billion, supposedly to compensate for the sharp reduction in private investment spending that occurred with the recession, as you note. But the reduction had a shelf life of 3 years. Exactly why would corporations increase their investments in the midst of a recession, with high unutilized capacity, when they can pick up the same advantage 3 years later, when the economy figures to have picked up?

halasz - "wage income as a % of GDP declined from 67% to 63%, a 4% absolute drop, oddly enough, though a mere 6% percentage decrease."

To which add a current 4.7% inflation rate for the first half of the year, combined with the expected across-the-board commodities price hikes of 5% coming this July, compounding to well over a +12% annual inflation rate for BushCo, a Carteresque economic performance.

To which add the YTD -35% decrease in the value of the US$ against a basket of industrial nation currencies.

To which add the staggering, spiraling growth of the M3 money supply, denominated on mere trust.

To which add the ballooning -$355 BILLION national debt, which is merely depreciation deferred.

To which add our incredible trade imbalance, which is deflation prolonged.

Yielding an overall decrease in US worker global net asset values (GNAV) of over 50% in one year, well within the range of the Great Depression I, putting America right up there with Argentina, Bolivia and Peru.

Which Barron's and WSJ have heralded not at all. Which Paul Kangas and Suzie Gerald still cutely pantomime in a 'life is beautiful all the time'. Which the pundits have inverted, crying, "Boom times are ahead! Put on a happy face."

We have entered a twilight zone, where the old economic laws and common sense notions of truth, time and value no longer apply.

Where oil tankers rebuffed from China hover off our own shores, waiting to unload only as needed to maintain the massively inflated price of gas.

Where the president begs commodity brokers not to take advantage of a latest terrorist attack.

Where martial economic decisions on the other side of the world, and in the White House, and the palaces of Saudi Arabia, make microeconomic analysis little more than a hand of pocket pool.

It is as though the musicians playing on the Titanic's deck commented amongst themselves,
"I say, old boy, does it seem the deck has increased it's pitch by 4% or so? Do you think this might impact our estimated time of arrival in New York Harbor? It would really be a bother to have to reschedule my next engagement!"

Madness, utter madness....

Proof that we are all only augenblick's within a darkened theatre, each staring mesmerized at a flickering bright puppet-box shadowed by ghosts.

All the same, doesn't it come down to the voter and his perceptions about how he's doing?
Does he care about the stats that show 1.2 million jobs have been created? Not unless he's one of them ( unlikely)
And how Has he been doing? The numbers show his wages have not kept up with inflation, no?
So how does he think he's been doing? And here's where the millions of advertising dollars have an effect. But the recent polls are showing that the voter is not such an easy push-over, no?
The average voter still needs to buy gas and get groceries and pay the cable bill. Not too many of these folks can be persuaded that things are better under Bush. I stake my faith on the average voter being average, not stupid.

I don't see where Schlesinger mixed up rate of change with value. He asserted that an improving economy is good from a political POV. I think history shows that he's right. It worked for FDR.

Whether the public and the media ought to give credit to Bush for the economic improvement is a separate question, with pro's and con's.

I do think it's unfair to blame Bush for job losses that occurred at the beginning of his term, before his economic program was in place. I also think it's unfair to blame Bush for increases in state and local taxes.

No the election comes down to how well he's actually doing, no matter how good your ads are you can't convinve a starving man he has just eaten. When Clinton was doing well people were employed, and profits from work were being shared. Now under Bush less people are working, and significantly less profit is being shared. Further we've gone from being stingy about sharing to outright criminal, without even a wiff of accountability, hence Krugman's screaming over the last 4 years.

The stabilization in the job numbers last three months has everything to do with large companies hiring disposable people at low wages, rather than any significant change in the labor market.
People who were getting paid well to actually create or help to create new products on the edge of the technology frontier are not going to be pleased working at Wallmart stocking shelves (read Services industry).

We, the US, were in the natural process of changing market structures domestically and foreign policy structures abroad under Clinton. Bush Jr and his old guard backers (read old economy corporate and cold war hawkish interests) siezed the reigns and forced the implementation of new radical policies that effectively have turned the clock back, and not surprisingly the cost to the average person has been huge. Its only now that the old guard is seeing how hard it is to work against the network effects of technological and social change. Literally the old ways of control (monopoly and dictatorship) are not viable solutions. They are not practical to implement and they cost way too much to maintain.

Brad, Your piece on employment/shares of national income, etc. and accompanying graphs confirmed what I have heard from people here in Oregon. Some ARE getting new jobs and NONE are making near the salary they had in their previous jobs.

From where did you get the statistics for "Selected Component Shares of National Income"?

How is it that woth lower compensation; a smaller percentage of adults working; and housing prices in a "bubble"; that homeownership is rising?

It would seem to me that if compensation per job is lower and housing prices are higher, then at the margins two-adult households where one spouse might choose between paid work and "housework" the choice of paid work -- or seeking paid work -- would be up, meaning the total percent of adults working would be up. Alternately, if compensation is down, spousal employment down or unavailable, and housing prices up, then homeownership rates should be down.

Is housing, actually, not in a "bubble" but getting cheaper compared to other expenses?

Is the perceived value of spousal "2nd" jobs changing, perhaps due to some sort of change in the tax code?

Pouncer, one consideration with respect to the level of home ownership is how much easier it is to get a mortgage today. There was a time within living memory where, other than special situations, you couldn't buy a house without 20% down; there was a time when you couldn't get an interest-only mortgage or (at least easily) an ARM. These changes have made it easier for people to buy.

Jim/Patrick, let's remember what this chart shows and what it doesn't show. What it shows is the distribution of national income; what it doesn't show is the underlying jobs picture.

Fortunately, we know the underlying jobs picture and can use it to understand the chart: for most of Clinton's first term, profits were rising in both absolute and relative terms, while a good but not great number of jobs was being created. During Clinton's second term, as a great number of jobs began to be created, employees began to have more "pricing power" as businesses competed for the scarce commodity of labor, and so employee compensation improved on a distribution of national income basis while profits declined.

What has happened now is that profits have improved while only the most modest of job growth has taken place, meaning we are still a good measure away from a situation where there is labor scarcity sufficient to drive up employee compensation.

So, in fact, the current situation isn't at all like 1997, despite the superficial resemblance of the curves....

"Jim - those 'worst, darkest days' of the Evul Librul Klinton just happened to be the earliest days in his administration. Hmmmm."

Hmmm... Did Bush the Elder have a second term that I missed?

Just for fun I downloaded and graphed out the BEA data for profits and compensation on the same scale -- rather than placing 10 higher than 65 -- to see what it might look like. Went back a few more years too. Sort of to get a unified picture of things in an accurate perspective.

Well, jim, all snarkiness aside, you did what i hoped someone would do, but only sorta. If you really want to make this useful: a.) go back to '47, where the data series begins; b.) increase the vertical axis, so that we can read the difference instead of having to make assumptions; c.) indicate on the horizontal access when each recession began and ended, so that we can compare the really relevant issue, namely cyclical behavior; d.) indicate within the profit area the after-tax profit, which is also available in the data set, and indicate within the employee compensation area the fringe benefits component, which is also available within the data set.

"As a share of the economy labor compensation has not been this low in almost 40 years (since 1966)"

The way I read the BEA numbers, employee compensation as a share of national income was 63.9% in 2003 and hadn't been that low since the 63.9% of 1997. That's six years.

But if we want to play the "share" game maybe there are other ways to look at it?

For example, during the recession employee compensation as a share of national income *rose* and peaked at 66.1% while corporate profits as a share of national income plunged by 28%.

It seems rather odd that so many people talk so much about profits rising *since* the recession while so rarely mentioning the plunge down they took before -- a plunge of share of NI that labor's share of NI did not follow.

(Did Bush get any credit for that? "Profits as share of NI are *way down* now -- but employees' compensation share has actually risen. Thank you, Dubya!"). ;-)

Is it really *surprising* that after a big profit recession profits have to first recover and then be strong enough for long to enough to fix all the broken balance sheets before hiring becomes strong again?

And what's the real point of this whole profit share business anyway?

I mean, is anybody seriously suggesting that somebody is volitionally controlling the shares of national income going to profits and compensation? Pushing one up and the other down? Or that anybody has any control over it at all? If not, what's the point?

If so, then *who* was the person who controlled the biggest bulge of same since LBJ's time that occurred during the Clinton years? I want the name! "Wall Street" Rubin?

Well, Jim, i guess this means that you aren't going to update your chart, but as for the rest of your post....

There are things we know to be true as an empirical matter: we know that this recovery has been the weakest in terms of job creation since world war ii; we know that real incomes are declining; we know that productivity has been soaring; and we know that profitability has been growing rapidly.

The national income chart merely shows the upshot of all of this: that during this recovery/expansion, the increases have flowed almost entirely to owners of capital and not to workers (hourly or salaried). If you would go ahead and lay in the start and completion dates of each of the post-war recessions, we could compare as to whether this is a standard phenomenon or not, but given the other things that we know, it seems highly unlikely that it is.

And that's all that it shows. What's so problematic about that? Is it because there's a clear implication - that job-creating policies would have led to more jobs and, therefore, increased upward pressure on wages that would have let to a more normative "split" between capital and labor?

If, instead of plotting 11% as if it is larger than 65% and getting yet larger than it all the time, one rather plots shares of NI at 1997 (the heart of the Clinton years) = 100, we get yet another picture. It looks like maybe employees still owe corporations some give-backs!

People can have all kinds of fun with charts and graphs.
http://www.mindspring.com/~jimglass/profitsandpay.htm
[updated]

"There are things we know to be true as an empirical matter: we know that this recovery has been the weakest in terms of job creation since world war ii;"

And as an empirical matter, we know that it was the *mildest* recession in terms of unemployment since WWII. No other recession had a trough with the unemployment rate as low -- the "best" recession unemployment rate since WWII.

It's funny how everyone has forgotten the "unemployment rate", which was the measure of recessions since WWII until now, eh? Well, 5.6% in addition to being "best ever" for a recession is actually better than average for the last 30 years -- so we can hardly call it the "worst labor market since Hoover" by *that* standard.

So we decide to prove it instead by the labor force participation rate -- taking as our base an historic all-time boom period when a bubble had drawn about two million people above trend line into the labor market. That's our base. And even from *there*, as the Prof's chart shows, the participation rate didn't even get down the level of the '91 recession, which was maybe the second-mildest ever. That's the worst labor market since WWII! ;-)

I don't know about you, but when employment has experienced the mildest recession ever I'd expect it to have the mildest recovery. And when profits have had a very steep recession I'd expect them to require a strong recovery before economic health resumed. Look at the gap between the two lines on my fun chart 1997=100, and see who's got the catching up to do. (Unless you think the Clinton years were outrageously over-profitable, of course.)

"...the increases have flowed almost entirely to owners of capital and not to workers (hourly or salaried). If you would go ahead and lay in the start and completion dates of each of the post-war recessions, we could compare as to whether this is a standard phenomenon or not, but given the other things that we know, it seems highly unlikely that it is."

What, you wouldn't look for yourself? I've got to be the empirical one? ;-(

OK, OK. I'll assume that the good old days of wise policy you are referring don't include Reagan's and the Stagflation 70s, so let's look at your "post war recessions" where labor got it's bigger share.

Corporate profts as % of NI in the years following the troughs of the post-war recessions of:
1949: 13.5%
1954: 13.3%
1958: 12.2%
1961: 11.2%
....
2001: 9.7%

Hey, for the *entire period* 1948-68 labor got its more generous share after coprorate profits took an *average* of 12.3% -- compared to 2003's exorbident, exploitative 11.0% And yes, during those 20 years when profits averaged 12.3% unemployment was indeed *lower* than during the following generation when profits dropped.

Well... maybe you are on to something! Profitable companies hire more than unprofitable ones ... so, a bigger share to corporate profits, a faster employment recovery ... so, we should be pushing policies to encourage more corporate profits!

Jim, why you? because you appear to be facile with converting tables into graphic form and i am not, and you appear to have a place to put this information so that others can access it, and i can't, so i thought that we all might learn something useful. my mistake.

That said, it's late, so i'm going to limit myself now with noting that it was a mild recession from a GDP perspective, not from an job loss perspective (take it up with the folks at the Bureau of Economic Research, i'm simply citing what they say), so right off the bat i discover that i'm going to have to roll up my sleeves and check your other insights, while i wonder what happened after 1968 that leads you to drop it from discussion, but that won't be until tomorrow....

Cool graphs. Maybe you can do something with the employment/population ratio chart that's being touted as another proof positive for the horrors we have to live through--e.g. extend it by three decades (as I suggested in another thread).